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In an opinion filed December 29, 2011, the California Supreme Court, in California Redevelopment Assn. v. Matosantos, 53 Cal. 4th 231, 135 Cal. Rptr. 3d 683, 267 P.3d 580 (2011) upheld Assembly Bill 1X 26, which dissolves redevelopment agencies as of October 1, 2011. The opinion also invalidated Assembly Bill 1X 27, which provided for the continuation of redevelopment agencies if the local jurisdiction agreed to make substantial payments to fund education and other functions. The immediate impact of this ruling is that it dissolves redevelopment agencies, and transfers control of redevelopment agency assets to a successor agency, which is contemplated to be the city or county that created the redevelopment agency. Because of the litigation and an associated partial stay, the Supreme Court extended all deadlines imposed under AB1X 26 by four months. Thus, the dissolution date of October 1, 2011 specified in AB1X 26 was extended to February 1, 2012. Enforceable obligations existing before adoption of the legislation in June 2011 are unaffected, and should continue to be honored by the successor agency.

Addressing AB1X 26, the Supreme Court noted that the Legislature has the authority to make the laws of the State: “The legislative power is the creative element in the government…it makes the laws….” This legislative power is plenary, that is, the Legislature “may exercise any and all legislative powers which are not expressly or by necessary implication denied to it by the Constitution.” A corollary of the power to make new laws is the power to abrogate existing ones. More specifically, if a political entity has been created by the Legislature, it can be dissolved by the Legislature, barring some specific constitutional impediment. For example, the Legislature has dissolved municipal corporations (such as the Town of Hornitos) and school districts. Citing the “Community Redevelopment” chapter of Miller & Starr, the Supreme Court noted that: “The Redevelopment Agency is solely a creature of state statute, exercising powers delegated to it by the State Legislature in matters of state concern, and the scope of its authority is, therefore, defined and limited by the Community Redevelopment Law….” Since redevelopment agencies were created by the Legislature, they can be dissolved by the Legislature.

The California Redevelopment Association (“CRA”) argued that Proposition 22, put on the ballot by redevelopment proponents and approved by the voters in 2010, amended the State Constitution in such a way as to effectively withdraw from the Legislature the power to dissolve community redevelopment agencies for the financial benefit of the State. Proposition 22 prohibits tax increment from being used for the benefit of the State. The Court explained that Proposition 22 addressed the handling of proceeds of taxes levied upon property in a redevelopment project, and its text and ballot materials gave no indication that it was intended to make redevelopment agencies or tax increment financing “a permanent part of the government landscape.” If, as the CRA argued, Proposition 22 was intended to so fundamentally alter the relationship between redevelopment agencies and the State as to essentially give them a constitutionally protected status, it would have said so. Quoting the United States Supreme Court, the Court observed that “the drafters of legislation do not, one might say, hide elephants in mouse holes.”

The Court next dealt with the constitutionality of the lifeline thrown to redevelopment agencies by AB1X 27. This legislation provided that a redevelopment agency may continue in existence if it voluntarily agrees to make “continuation payments” to fund local government functions, including special districts and school districts. The Court found that AB1X 27 violates Proposition 22 since the continuation payments involve “the direct or indirect payment, remittance, loan, or transfer of tax increment allocated to community redevelopment agencies” for the benefit of the State. Accordingly, the legislation was unconstitutional.

In summary, the Supreme Court held that AB1X 26, which dissolves redevelopment agencies, is constitutional, while AB1X 27, which allows a redevelopment agency to continue in existence if it makes “continuation payments” for the benefit of local government functions, violates Proposition 22 and is therefore unconstitutional.

POSSIBLE FURTHER LEGISLATION.

The CRA and the League of California Cities lobbied state legislators to extend the dissolution date for redevelopment agencies to April 15, which did not occur. They are now working with state legislators to resolve many implementation issues with respect to continued redevelopment functions in California. The intent of such legislation will apparently be to focus redevelopment activities in several core areas which align with State public policy:

Creation of jobs

Affordable housing

Brownfield/Environmental Remediation

Infill and transit oriented development

Military base reuse

Replacement of infrastructure in blighted communities

The Supreme Court’s ruling in CRA v. Matosantos makes clear that it is up to the Legislature to decide the manner in which redevelopment functions in California occur and are funded. Accordingly, the ruling significantly strengthens the Governor’s and Legislature’s hands in defining the future of redevelopment.

NEXT STEPS IN WINDING UP REDEVELOPMENT AGENCIES.

AB1X 26 specifies the manner in which the obligations, assets and affairs of a redevelopment agency are to be wound up, and the Supreme Court’s ruling upholds those provisions. These are some highlights:

Successor Agency—The local agency creating the redevelopment agency (usually a city or a county) is presumptively the successor agency unless it “opts out” by a resolution filed by January 13, 2012. In the event of an “opt-out,” any other local agency in the county in which the redevelopment agency operates may elect to be the successor agency. If none so elect, a “designated local authority” shall be formed and the Governor shall appoint three residents of the county to serve as the governing board of the authority. (Health & Saf. Code, §34173.)1

Transfer of Assets and Property to Successor Agency—All assets and property of the redevelopment agency are to be transferred to the successor agency on February 1, 2012, the date agencies are dissolved. The successor agency has all the rights and obligations of the redevelopment agency (except those repealed, restricted or revised pursuant to AB1X 26), and must continue to perform all enforceable obligations and pledges of revenues associated with enforceable obligations are to be honored. (§§34173, 34175, 34177, 34179.)

Continued Funding of Redevelopment Projects/Loans/Bonds/ Enforceable Obligations—Once redevelopment agencies are dissolved, a “redevelopment obligation retirement fund” to be administered by the successor agency is created, and a “redevelopment property tax trust fund” is created by the county auditor-controller. The trust fund is for receipt of tax revenues that would otherwise have gone to the redevelopment agency, which are to be used for payment of loans and indebtedness incurred by the redevelopment agencies, and completion of projects. Amounts in excess of those necessary to fund the obligations of the agency are to be distributed as property tax revenues. (§§34175, 34172.)

Disposal of Assets—The successor agency has the obligation to dispose of assets and properties of the former redevelopment agency as directed by the oversight board, “expeditiously and in a manner aimed at maximizing value.” (§34177(e).) The oversight board must direct the successor agency to “[d]ispose of all assets and properties of the former redevelopment agency that were funded by tax increment revenues of the dissolved redevelopment agency” or “may instead direct the successor agency to transfer ownership of those assets that were constructed and used for a government purpose, such as roads, school buildings, parks, and fire stations, to the appropriate public jurisdiction pursuant to any existing agreements relating to the construction or use of such an asset.” (§34181(a).) There is no guidance as to the manner in which this disposition of assets will occur or when.

Completion of Ongoing Projects—The successor agency is to wind down the affairs of the redevelopment agency and to oversee development of ongoing projects until contracted work has been completed or the remaining contractual obligations can be transferred to another party. (§34177(h), (i).)

Authority Withdrawn—Redevelopment agencies have no further authority to issue bonds, incur debts, make loans, enter into contracts, pledge or encumber property, dispose of assets, dispose of or acquire property, or transfer any assets or funds, except as provided for in the legislation. (§34163.) Among other things, the agencies have no further authority to condemn property. (§34165.)

Enforceable Obligations—”Enforceable obligations” as of the time the legislation was enacted (June 2011) continue to be enforceable, and are to be performed by the successor agency. These enforceable obligations include bonds, and “any legally-binding enforceable agreement or contract that is not otherwise void as violating the debt limit or public policy,” among other obligations. (§34171(d).) However, transfers by the redevelopment agency to a city, county, or public agency after January 1, 2011 may be reversed to the extent that the property is not contractually committed to a third party. (§34167.5 (commonly referred to as “claw back” provisions).) The definition of “enforceable obligations” with respect to the dissolution provisions of AB1X 26 is far from clear. Whether an obligation constitutes an “enforceable obligation” or whether it may be subject to the claw back provisions will have to be evaluated on a case-by-case basis.

Oversight Board—Each successor agency will be subject to an oversight board composed of seven members, which will include a variety of individuals appointed by various local government entities, including the mayor, county board of supervisors, superintendent of education, chancellor of community colleges, and the largest special district within the county within which the redevelopment agency operates. The Oversight Board will oversee the wind-up process. (§§34179, 34180.)

Schedule of Enforceable Obligations—There are various provisions dealing with preparation and timing of draft and revised payment schedules identifying enforceable obligations. (§34177.) In general, these are the obligations which the redevelopment agency or its successor are authorized to pay.

Clean-Up Legislation—Finally, and importantly, the legislation calls for the California Law Revision Commission to draft a Community Redevelopment Law Cleanup Bill for consideration by the Legislature no later than January 1, 2013. (§34189.) Presumably, this cleanup bill will provide further guidance on areas not addressed by this legislation, or as to which there is ambiguity or uncertainty.

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